Paraphrasing Churchill, investment arbitration is the worst form of foreign investment dispute resolution, except for all the others. Post-Suez, governments are more civilised than to employ gunboat diplomacy for their own investors, and local courts are inherently partial. Achieving neutrality is the objective, and the only means: investment arbitration. This is the conventional wisdom for rationalising the use of arbitration for foreign investment disputes.

Investment arbitration is imperfect. An oft-cited cause of this imperfection is doctrinal inconsistency, with an ICSID appellate body being trumpeted as the antidote. Partiality of arbitrators, propensity to annul decisions, and lack of transparency have also been identified.

Although these reasons might appeal to legal academics and practitioners, they fail to explain the substantial popular dissatisfaction with investment arbitration. The popular discontent is grounded in something more fundamental: investment arbitration suffers from a legitimacy deficit. This legitimacy deficit has two sources being neocolonialism and legal formalism.

The genesis of foreign investment law is neocolonial justice. Investors expect Western standards of justice, and the assumption is that local courts do not offer it. Operatively, foreign investment law imports Western standards of justice for foreign investment disputes, by way of investment arbitration, to satisfy this expectation. Even with the jurisdictional condition precedent to first use local courts for disputes, foreign investment law reserves ultimate jurisdiction on foreign investment disputes for investment arbitration.

Neocolonialism manifests itself in many ways in investment arbitration.

Foremost is the use of arbitration itself for resolving foreign investment disputes. Modern arbitration is a by-product of colonialism. In its formative years, modern arbitration developed as British traders began to exploit commercial opportunities created by the British Empire – land law occupied British courts were ill-suited to resolve foreign trade disputes.

Additionally, there are other factors that make neocolonialism apparent, from the usual identity of the parties and the arbitrators, to the educational backgrounds of the arbitrators, and the dominance of Anglo-American law firms as legal counsels. The consequence is that investment arbitration is perceived as being far from neutral, but more ‘Western’.

Subconsciously aware of their perceived partiality, arbitrators instinctively adopt legal formalism in an attempt to dispel this perception. They are well intentioned, but it is ultimately a flawed strategy.

First, the nature of foreign investment disputes means that there is a myriad of pertinent factors in question, not only legal factors. All the other factors, most particularly the economic factors, are discarded when arbitrators subscribe to pacta sunt servanda.

Second, and most importantly, the vagueness of foreign investment law requires arbitrators to construe it. In this respect, the distinction between construction and interpretation must be appreciated. Construction is the process of giving meaning to vague terms, while interpretation is the process of selecting the correct meaning of ambiguous terms.

Construction necessarily involves creating law. Take, for example, the vague standard of protection ‘fair and equitable treatment’. To address its vagueness, arbitrators have developed ‘sub-rules’ which define ‘fair and equitable treatment’, such as the ‘dominant element’ of the legitimate expectations of the investor.

When arbitrators create these sub-rules, they engage in law making. It could be countered that the nature of foreign investment law means that this is the task of arbitrators. This is not dispute. What is in dispute is the appropriateness of that task for arbitrators, particularly considering the perception of neocolonial justice. In summary, arbitrators do not have the mandate or authority to legislate for developing states.

If the reasons above are accepted, the conclusion is that the legitimacy deficient means that investment arbitration is not merely imperfect, but flawed.

Juries are the mechanism to overcome these problems.

It is submitted that a group of twelve randomly selected jurors should make the decision, by a qualified majority of eight, on the merits question: has the host state failed to protect the investment? In theory, a dispute resolution process for foreign investment disputes, which includes juries, could take place at any arbitral institution, although the administrative facilities of ICSID make it the most appropriate forum.

It might be nauseating to some, but when vague rules have to be applied to complex and multilayered fact scenarios, value based decisions pervade. All the relevant factors may be taken into account, not merely the legal factors. This should be celebrated. Value based decisions should be made in foreign investment disputes, and the proposed jury has the credibility to make these kinds of decisions, as opposed to a three member arbitral panel.

On questions of procedural law, creating the perception of justice is paramount. In this regard, it should be considered: would a decision of a ‘global jury’ on the natural resources of a state offer a greater perception of justice than the current system? Following this logic, the credibility of the jury would be solidified by constituting it with jurors of various nationalities: a global decision-making body for a global area of law.

Juries are not without their difficulties and disadvantages.

The principal problem would concern logistics. Who could serve on a jury? How would the jury pool be created? Would the jury selection process intolerably delay proceedings?

These problems could be overcome. The potential jurors could be drawn from the diplomatic service in Washington and New York. Jury selection process could be limited by restricting the grounds for challenge. Moreover, challenges against jurors would be limited by virtue of the limited information legal counsel would have on the jurors, compared to the wealth of information available on arbitrators.

Another problem lies in the legal framework. Foreign investment law does not provide for juries. There are two options to overcome this problem: amendment or augmentation.

Amendment involves rewriting the Washington Convention to provide for juries. As the proponents of an ICSID appellate body have fatalistically recognised, however, amending the Washington Convention is not realistic.

Augmentation would involve creating an optional protocol to the Washington Convention. By signing this optional protocol, signatories would stipulate that if they are sued at ICSID, a jury would be used during the merits phase. This is a viable option for creating a workable legal framework for juries.

There will be considerable psychological aversion to juries in foreign investment dispute resolution, much of it borne out of unfamiliarity with juries and the complexities they entail.

The current system is attractive because of its simplicity, but this creates a striking disparity between the substantive nature of the disputes, and the procedure for their resolution. In some disputes, the future of the natural resources of developing states is in question. How should the average citizen of such a state react when informed that the wealth, upon which this state hopes to develop, is decided by such a simple process?

A global jury might not completely satisfy this hypothetical citizen, however, it would certainly be more satisfactory than informing him or her that three Western educated arbitrators will decide.

4 comments

Martin, I completely agree with your viewpoint that investment arbitration is both flawed and perceived to be flawed (though the flaws and perceptions of flaws don’t match). I don’t agree with your historical viewpoint on the English Courts which were, and continue to be, extremely popular with many parties for the resolution of international disputes. Indeed, if I am not mistaken, the majority of Commercial Court cases do not involve any English parties and are often preferred by clients to arbitration. As to the use of juries, it is an interesting debating point but not, I believe, a realistic solution. Unless perhaps you adopt the very historical approach of selecting the 12 good and true men who have most personal knowledge of the dispute in question! I think investment arbitration could improve its approach markedly if it did not ignore some of the guiding maxims of international commercial arbitration. It needs to be quicker and cheaper. As long as it remains slow and expensive there will always be the perception that a relatively impoverished host state will be disadvantaged. As to the issue of law, we have entered an era when some arbitrators consider that, whether in commercial or investment arbitration, it is their job to create law, at least where there are gaps. In my mind this is a very bold and presumptuous approach and the correct one should be that it is for appropriate law making bodies, whether international or national to have the sole right to create law. It is for courts and tribunals to interpret it.

As regards the popularity of English courts, I accept your contentions. My argument is that modern arbitration practice is very much influenced during that period when Britain began to build its empire and, for this reason and others, is very much a Western mechanism of dispute resolution. The disputes arising from commerce with the colonies were, particularly before the 19th century, more suited to arbitration. The reasoning for this, in my opinion, is that courts were principally occupied with disputes concerning the most valuable asset of the times: land.

Juries would be difficult, but they always are. We should be willing to accept this difficulty in view of securing decisions with greater legitimacy. I think that it would be better to bring in jurors who had no knowledge of the law or facts. In this way, each juror would start with a ‘clean slate’, rather than being weighed down by any prejudices.

I am not convinced that investment arbitration should aim to become quicker and cheaper. Such an approach does not properly recognise the gravity of the disputes for the states concerned. The rage directed towards investment arbitration is primarily borne out of the restrictions on sovereignty that it represents. Sovereignty for a state is comparable to freedom for a person; in other words, its most valued right. We accept that when we restrict a person’s freedom through imprisonment that the procedure must be arduous to achieve justice, and the same attitude should be adopted with respect to foreign investment disputes.

Finally, on the matter of arbitrators creating law, you are right that where there are gaps, arbitrators must create law. However, they do not have the democratic authority for creating law, and, this being the case, this is one factor which contributes to the ‘legitimacy deficit’. The solution is for states to further refine foreign investment law. In the absence of that, I suggest that juries could be used simply because their decisions would have greater legitimacy than those of arbitrators.

Thanks for your considered response Martin. As to the legitimacy deficit, I perhaps wasn’t clear. I agree that it should not be for arbitrators to create law. As to the speed and cost point, the concern is that developing states perceive themselves to be bullied by wealthy investors with seemingly endlessly deep pockets when it comes to paying legal bills. On the other hand, looking through the other side of the lens, justice should not be restricted to the wealthy. It should be equally available to all investors.

It is a good point that developing states feel bullied and intimidated by wealth investors, and there is no doubt that the length and complexity of the disputes is a contributive factor to this feeling. However, I think that the main factor which engenders this feeling is mere possibility of being sued, and the Western domination of the accompanying dispute resolution process.

One of my central contentions is that this perception of Western domination could be tempered if juries were introduced. The final resolution would have a greater global element, if the jury were properly constituted.

I am conscious that the proposition of using juries is difficult to convince people of, but I believe that much of the opposition stems from psychological aversion to juries to those unfamiliar with them. If we are serious about delivering legitimate decisions to resolve foreign investment disputes, then I think that the use of juries is one possible solution. Although it is anecdotal assertion, if the ‘reasonable citizen’ is asked about the legitimacy of decisions on foreign investment disputes, the decision of a global jury must have greater legitimacy than three arbitrators, two of whom are party-appointees.